Independent Financial Analyst (PHOTO/Courtesy).
‘I’m walking on sunshine’: Is the current state of mind of Tesla Incorporation’s equity holders after the company attained intriguing success, reaching a stratosphere never before seen by the corporation in its entire history.
Trading on the Nasdaq under the ticker–TSLA, On 21st October 2021, the company’s stock rose to an all-time high of $910 per share a day after its third quarter earnings were reported showing tremendous performance. Tesla’s revenue increased by $1.8 billion from the second quarter of 2021 exceeding the company’s projected revenue for the third quarter by $60m a 0.40% surge.
To put this plainly, in the past two years, Tesla’s stock price has jumped from $37 per share on 31st May 2019 to $910 per share in October 2021; a 2,359% gain with a market capitalization of over $900 billion making it the seventh largest company by market capitalization behind: Apple, Microsoft, Facebook, Alphabet-Google, Saudi Aramco and Amazon.
This makes Tesla the biggest automobile manufacturer with a combined market capitalization value of: Toyota, Volkswagen, Daimler, BMW, Ford, Honda, Ferrari and GM—General Motors.
Tesla’s tear has been to the benefit of the company’s investors and the grand pooh-bah—Elon Musk, making him the wealthiest man on the planet in never before heard breadths of $250 billion.
This blast off can be attributed to the sale of 241,391 cars in the third quarter alone, increased deliveries Year-on-Year touching 73%, and a sheer quantum leap as the US is experiencing an economic growth spurt undeniably triggered by quantitative easing, pushing inflation to a peak last seen in the early nineties.
The result, the price of commodities are at an all-time high: Brent Crude over a 100% rise, West Texas Intermediate 102%, Cotton 65%, Coffee 79% , Sugar 46%, all expansions in the commodities’ prices in the past one year.
Interestingly, Bitcoin too reached its pinnacle above $66,900 this October after it had hit rock bottom because of a crack down on miners in China in June this year.
The automotive industry has similarly been a direct beneficiary. To put this in perspective, all automakers except Ford have seen sales increase by up to 32% this year in the US according to goodcarbadcar.net
Presently, there are 3.3 million more job openings than unemployed people in the US; in-addition to the S&P 500 closing at all-time highs a record 55 times this year alone. The most in 21 years with the exception of 2017 when the index had 62 all-time high closes.
In essence, the US economy is on a much needed ‘sugar high’ after the slump created by the COVID 19 pandemic. But like all highs, this spate of abundance too will subside, disrating prices and with them—Tesla Inc.
It’s for this strategic reason that I would straightaway bet against Tesla stock because I believe its dip will present itself shortly.
Fundamentally, according to the Reflectivity Theory for Capital Markets advanced by billionaire economist George Soros, “The self-enforcing effect of market sentiment, raises prices that attract buyers whose actions drive prices higher until the process becomes unsustainable” and the sentiment is reversed, bringing negative expectations into play causing a downward spiral.
Loosely translated in the scenario of Tesla, the skyrocketing of its price, is going to attract more buyers of its stock, making it more lucrative and shooting its price further up until public opinion on the company will be swayed unfavourably— most likely by systematic errors.
Some of the systematic errors waiting in ambush for Tesla regard its Full Self-Driving Capability (FSD) technology.
There is general discontent regarding the latest version of the FSD software with one Tesla owner going on to share film on social media of the software’s inability to detect a red traffic light at an intersection; alongside Autonomous Emergency Braking (AEB) events reported. When these gripes amplify, they will change the euphoric market sentiment to a sombre one; bringing the electronic vehicle’s stock price down with it.
Example: In April 2021, there was a car crash that killed its two occupants and this generated chatter attributing it to the autopilot feature of the Tesla Electronic Vehicle (EV) they were riding in. Soon after, Tesla recalled almost 6,000 Model 3 sedans because of brake caliper bolts and 5,500 Model 3 and Model Y cars due to faulty seat belt fasteners in May 2021.
This was immediately trailed by another recall in June 2021 of more than 285,000 vehicles in China owing to an issue with the car’s cruise control potential and unexpected speed increases.
It’s by no coincidence that these incidents in the first six months of 2021 co-occured with Tesla’s share price dropping from $880 to $654, a $226 (26%) nose-dive in the months preceding July.
And then there’s the Solarcity lawsuit that was brought against Musk by Tesla shareholders in July this year. In the case, the shareholders argue that Tesla’s acquisition of Solarcity in 2016 wasn’t in the best interests of the shareholders but a bailout to Solarcity which was run by Musk’s cousin—Lyndon Rive.
This acquisition ended in Tesla assuming Solarcity’s debt. Truthfully, Solarcity hasn’t added much to Tesla since it’s acquisition.
Post trial arguments for the case are scheduled for January 2022 and history has proved time and again that the goriest fights, are those in-house. This melee with the shareholders is going to divert the company’s management’s attention and resources; whilst generating enough static to disrupt Tesla’s upward share trajectory.
At the present time, there’s a noticeable observation that Tesla’s dominance has plunged owing to other players —Ford, Nissan and Audi stepping up.
In between January and August 2021, 63% of all new EVs in the US were Teslas, that’s down from 80% in the same period in 2020. In China, Tesla’s biggest market, 78,600 new companies entered the ‘energy vehicles’ industry in 2020 according to China Passenger Car Association.
Too many entrants into the energy vehicle sector means that there’s going to be an excess of brands competing purely on price; and with Tesla’s ever changing prices—In early October, Tesla upped prices for its Model 3 and Model Y in the US by $2,000, the seventh time the models have experienced a price lift in 2021alone. Meaning it will not favourably compete particularly internationally on the basis of price.
“The worldwide automotive market is highly competitive and we expect it will become even more competitive in the future…”: acknowledged Tesla in their 10-k filling for 2020. This competition will downsize its market share, reverse the market sentiment of its dominance and dent Tesla’s share price.
What’s more, the global chip shortage has been posited by experts to linger on until 2023. Add that to the battery deficiency and you have yourself a recipe for unending squawks guaranteed to negatively impact the corporation’s share price.
Federally, the US is experiencing inflationary pressures that have spilled over to the equity markets causing a swell in stock prices. In August, the 12 month Personal Consumption Expenditures (PCE) inflation rate was 4.3%, last seen in January 1991.
This means to curb inflation, the Fed is going to implement a taper: reduce its purchase of bonds and increase yields to reduce the amount of money in supply. This will shock the markets sending them into decline, and with that, Tesla’s share price.
Right now, it’s rainbows, butterflies and unicorns for Tesla shareholders numbering 5,353 as of 1st February 2021. These are having reveries of a stocksplit once Tesla’s share price hits $1,000 and any talk of a dip or short-sell is met with ultra-aggression as Michael Burry the reknown ‘Big short’ investor has endured.
However, going against the tide is what has made titans like Elon Musk; and more importantly, keeping one foot back as he takes big strides has turned him into a virtuoso as he has done with Tesla while keeping Space X private for now.
Tesla shareholders can approach this share price boom the same way for alpha returns—straddle long and short positions.
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Mark Kidamba
Independent Financial, Investment Analyst
Twitter: @m_kidamba
